The US Senate has narrowly approved the 2004 federal budget, but has placed limits on President Bush's tax cutting plans.

Mr Bush's top priority has been passing his "jobs and growth" tax bill, which will abolish taxes on dividends for investors in the stock market at the cost of $726bn over ten years.

But now the Senate has cut that sum in half following a close 51-50 vote which approved the $2.2 trillion budget for 2004.

Although the president's Republican Party controls both Houses of Congress, moderate Republicans in the Senate objected to the size of the tax cut when the final costs of the war against Iraq are still unknown.

We have spent money like drunken sailors

Republican Senator George Voinovich

The chairman of the Senate finance committee finally conceded that the Senate would stick to the tax cut limit after failing to reach a compromise with the House of Representatives, which wanted a larger figure.

"This means that, at the end of the day, the tax cut side of the growth package will not exceed $350 billion," said Republican Charles
Grassley.

"There would be no budget and no
growth package without our agreement."

Down to the wire

The House and Senate have been working for the last week in attempt to forge a compromise on the budget resolution before leaving for their Easter recess.

The House leaders had proposed splitting the difference between Mr Bush's plan and the Senate version, and limiting the tax cut to $550bn, which they approved earlier on Friday by a vote of 216-211.

But in a highly unusual move, they failed to persuade Senate negotiators, and the two branches of Congress have passed two different budget bills.

The details of the tax plan will still have to spelled out by other Congressional committees, leaving the whole matter to face another highly controversial vote in the summer.

White House pressure

And if the Republican leadership can persuade some moderate Senators to change their mind, it could still have enough votes to pass a larger tax cut later on.

"This place does not set priorities. This place does not make hard decisions. This
place just continues to say 'yes' without any consideration to the next generation," he added.

Mr Bush feels so strongly about the tax cut that he mentioned it in his first press appearance after the fall of Baghdad.

His press spokesman, Ari Fleischer, said that he was still hoping to preserve the dividend tax cut whatever the size of the final budget deal.

Budget deficit

The moderates also include Maine Senator Olympia Snowe, Rhode Island Senator Lincoln Chaffee, and Arizona Senator John McCain, who ran against Mr Bush for the presidential nomination in 2000.

They are concerned at the growing budget deficit, which is projected to reach more than $300bn next year before the cost of the war is included.

The non-partisan Congressional Budget Office has recently said that the tax cuts and additional spending proposal would increase the total government debt by $1.2 trillion by 2008.

Airline aid

In a separate vote, House and Senate negotiators reached agreement on $3.5bn in aid to US airlines hurt by the Iraq war.

The aid, which is part of a different supplementary budget bill covering the cost of the war in the current (2003) financial year, was opposed by President Bush.

The bill includes $2.4bn for extra security costs, $520m for a temporary suspension of passenger security fees, $600m to extend war risk insurance, and $275 million to retrain airline workers laid off by the crisis.

US airlines are facing huge losses, and several, including the second largest, United, have already sought bankruptcy protection in the courts.